ECB hints at possible increase in interest rates before September

Interest rates will be raised again before the end of September, the president of the European Central Bank has hinted.

In the European Parliament in Strasbourg yesterday Mr Wim Duisenberg said inflation in the euro area was expected to stay below the ECB's 2 per cent limit but there were still "upside risks".

"There may be months [when inflation] will be more than 2 per cent but on average we expect an inflation rate close to 2 per cent, with risks on the upside. What we will do about it depends on further developments of circumstances," Mr Duisenberg said.

According to Mr Aziz MacMahon, economist at Ulster Bank, this means the ECB is likely to raise rates by a half percentage point in September, from the current rate of 4.25 per cent.

However, he added that it was also possible the Bank could surprise and raise rates before then.

Solomon Smith Barney economist Mr Jose Luis Alzola said these "decidedly hawkish remarks" build on those already made by executive ECB chief economist Mr Otmar Issing and vice president Mr Christian Noyer, suggesting that rates are shortly on the way up.

He added that the change in tone was probably due to data suggesting that inflation would remain close to 2 per cent for months (with June likely to jump to 2.2 per cent) and continued strong growth in money supply and credit. Today Mr Duisenberg will give more details of the ECB's view at the press conference following the regular Governing Council meeting.

According to Mr Duisenberg, the euro zone's economic outlook was the best for 25 years and he did not understand those who accused the ECB of seeking to slow growth.

"In the past 25 years the average growth rate of euro area gross domestic product has been between 2 and 2.5 per cent. We are now in for a period this year and next year when growth will be in excess, I would even say considerably in excess, of 3 per cent a year," Mr Duisenberg said.

But he added there was no evidence that the euro area economy had the capacity to grow fast without stoking inflation - a concept which had been dubbed the new economy.

"There is some evidence - although not uncontroversial itself - of the emergence of a new economy in the United States. By contrast it is difficult as yet to find clear evidence of a new economy in the euro area," he said.

Mr Duisenberg repeated a pledge first made to the assembly last autumn to publish the ECB's macroeconomic forecasts, adding this should be possible "towards the end of 2000". But he cautioned against reading too much into this move.